Record-setting pay raises add fuel to inflation’s fire

Let’s talk about an inflation issue that makes folks squirm — record-breaking pay raises.

It’s one of the key reasons the cost of living is surging at 40-year highs.

This spring, Southern California bosses paid 5.7% more in salary for workers than a year earlier, according to the Employment Cost Index from the Bureau of Labor Statistics. The metric tracks wage changes the typical worker gets in 15 U.S. job hubs, including the region that combines Los Angeles, Orange, Riverside, San Bernardino, and Ventura counties.

That 5.7% increase for the second quarter was up from 5.6% in the previous three months. It’s the second-highest reading for this local pay benchmark dating to 2006. Only last summer’s 6.5% annualized rate of raise was higher.

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Soaring salaries are highly visible fallout from the pandemic era’s alterations to the job market. Wages surge in many industries as a labor shortage emerged from the initial economic chill of the coronavirus outbreak.

Now, inflation has surpassed these wage hikes. The cost of living is up 9.4% in a year in the Inland Empire and 8.6% in Los Angeles and Orange counties. Nationally, the CPI was rising at a 9.1% annual rate in June — a 40-year high.

But labor costs are a big expense for many products, especially services. And if businesses pass along the cost of pricier energy, taxes, real estate, etc., the same holds true for what the boss is paying for talent.

Nationwide pattern

Inflated pay is not just another Southern California economic quirk — even if, by this measure, local bosses often top U.S. metro rankings for raises.

These wage stats show how employers across the nation are paying up for staff.

Southern California’s springtime raises tied the national pace of pay hikes — 5.7%, a record high for the U.S. index. Curiously, U.S. raises have topped local pay hikes by this measure in only one quarter in the past eight years.

Among the other metro areas, the spring’s fattest raises were found in Miami at 6.8%. Smallest? Washington, D.C. at 3.8%. The pace of salary jumps increased in 12 increases of the 15 hubs.

This index reveals an intriguing swing in power in labor markets during the pandemic. Since the pandemic struck, pay hikes doubled in size in many places, including seven of the 15 metros.

Now, let my trusty spreadsheet take us back to 2015-19 when raises were finally shaking off the dampening impact of the Great Recession.

Southern California bosses in 2015-19 handled out 3.4% raises on average, No. 1 among the 15 metros, according to this index. That easily bested the nation’s average 2.6% raise. By the way, the smallest raises in 2015-19 were in Houston, at 2%.

And yes, U.S. inflation averaged 1.5% in these five years. So the smaller raises did have far more buying power. But let’s compare the size of pay hikes from the years before COVID-19 with spring 2022 to see how it’s become a worker’s market for paychecks.

Southern California raises were 67% larger this spring vs. 2015-19. And stunningly, that bump was the third-smallest of the 15.

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The U.S. index’s rate of increase ballooned by 116% in the same timeframe. The largest surge was seen in Houston, where raises tripled to 6.1%. The smallest was found in the Bay Area where raises were up 47% to 4.5%.

Bottom line

There are many culprits inside the 2022 inflation storyline. Simply put, too much government stimulus to mute the pandemic’s economic hit collided with too few products to buy. Meanwhile, the world’s manufacturing and delivery capabilities got hopelessly tangled.

All that spare cash allowed numerous consumers to spend freely on goods and services. Those spending sprees created big profits for many employers. Those same bosses now battle amongst themselves with higher salaries to retain and attract staff.